Differentiated Duopoly with Asymmetric Costs: New Results from a Seminal Model

Abstract

This paper re-considers the comparison of Bertrand and Cournot equilibria in a differentiated duopoly with linear demand and cost functions. It focuses on the case of substitute goods, and allows for cost asymmetry between forms. The main finding is that, when the degree of cost asymmetry is sufficiently high and/or the degree of product differentiation is sufficiently low, equilibrium profits of the efficient firm and the industry profits are higher under price than under quantity competition. This contrasts with a standard result by Singh and Vives (1984), that is, with substitute goods both firms earn higher profits under Cournot than under Bertrand competition.

JEL Classification: D43, L13